Britain Signals Intention to Help Ireland in Debt Crisis

James Kanter and Steven Erlanger|The New York Times

Wednesday, 17 Nov 2010 | 2:22 PM ETThe New York Times

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The British government signaled Wednesday that it could offer direct financial assistance to Ireland, even though Britain is outside the euro zone, as prospects grew for an international rescue package to avert another European debt crisis.

Georges Gobet | AFP | Getty Images

Irish Finance minister Brian Lenihan

The British offer came after finance ministers from the 16 countries using the euro decided to “intensify” talks with Ireland on possible aid to shore up the country’s troubled economy and banking sector.

A team of experts from the European Union and International Monetary Fund was to arrive in Dublin on Thursday to begin what was expected to be several days of meetings with government officials.

The Irish Prime Minister Brian Cowen again insisted that there was no application for a bailout, but told parliament in Dublin that discussions would take place “based on the facts.”

Dublin has insisted it is not looking for a bailout and has sufficient cash on hand to last until next spring. But the uncertainty about its long-term finances has pushed up borrowing costs for Ireland as well as similarly-strapped Portugal and Spain, raising pressure for bold measures to stem the contagion.

At their meeting Tuesday night, the euro zone ministers also signaled continuing concerns about efforts to rein in the budget deficit in Greece, where the debt crisis originated early this year.

Joining the group on Wednesday, George Osborne, the British Chancellor of the Exchequer, noted that British banks are the most heavily exposed to the Irish financial sector, and that it was in “Britain’s national interest that the Irish economy is successful and we have a stable banking system.”

“Britain stands ready to support Ireland in the steps that it needs to take to bring about that stability,” Mr. Osborne told reporters going into the meeting.

The very public struggle and ensuing market unease highlighted how the bloc has again found itself confronting a crisis of confidence in the euro and, ultimately, in its ability to manage its economic problems — and in a timely fashion.

“The negotiations have been problematic because at the core there is a conflict of interest,” Ken Wattret, an economist with BNP Paribas, said on Wednesday. The E.U. wanted “to stop contagion spreading by pushing Ireland” to accept a bailout with the involvement of the International Monetary Fund, Mr. Wattret said. But the Irish government was proving “unwilling to give up control of its economic policy,” he said.

Analysts in Dublin suggested that the government would put off announcing its four-year budget plan until next week while the E.U.-I.M.F. mission looks it over. Afterward, a package aimed at bolstering the banking system could come as early as next week. Although it would have to be delivered through the government, Irish officials could still argue that they were not being bailed out, but cooperating with the rest of the E.U. to help ease euro-zone anxieties.

Mr. Cowen stuck to that line under harsh questioning in parliament on Wednesday, saying Ireland was working with its European partners on issues that were affecting the euro area and Ireland.

Bailout for Ireland?

Ireland has agreed to work with a joint EU-IMF mission to help its banking sector, but will the debt-stricken country continue to resist a bailout? Art Hogan, director of global equities at Jefferies joined CNBC to discuss the matter.

But Olli Rehn, the European Union’s economic commissioner, noted earlier that the problems of the banks and the government “are connected,” since the government guaranteed the bank liabilities two years ago.

Another struggle is still underway in relation to Greece’s bailout this spring from the E.U. and I.M.F., worth €110 billion, or about $150 billion.

On Wednesday, the Austrian Finance Minister Josef Pröll said Athens had not fulfilled all the requirements of its bailout related to cutting the budget deficit. He said the E.U. would thus delay the payout of the December installment until January.

However, the European Commission and the Greek government denied there would be any delay in the third tranche, saying it had always been anticipated that the payment would be “concluded at the beginning of January.”

The premium investors charge for holding Irish debt remained sky high on Wednesday in an early indication that financial markets were unimpressed by Ireland’s decision to reject immediate E.U. financial assistance. Meanwhile the costs of insuring against default by Ireland jumped, while those for Spain and Portugal also rose in a sign of the contagion that E.U. leaders fear most.

"Urgent"

Portugal paid a sharply higher interest rate amid lower demand in a €750 million sale of 12-month bills Wednesday, The Associated Press reported from Lisbon. The government debt agency said the average interest rate was 4.81 percent, up from 3.26 percent for the same bills two weeks ago.

With Ireland not facing the same immediate funding difficulties that forced Greece to accept an I.M.F. program in the spring, the government in Dublin probably may be able to afford to let the situation rumble on for a while longer — with potentially adverse consequences for the entire eurozone.

Brian Lenihan the Irish finance minister, said in Brussels late on Tuesday that assistance for Ireland was not inevitable. “I would not agree with that analysis,” he said. “What we are talking about is market risks and the way you address those risks.”

“I am not going to put a timeline on this,” Mr. Lenihan added, referring to the intensified discussions, “but this is urgent.”

Brian Lucey, a professor of finance at Trinity College Dublin and a former economist for the Irish central bank, said that the distinction between the government and the banks was politically useful for Mr. Cowen, who is struggling to hold on to a fragile majority in parliament.

“It’s right to say that it’s not a state bailout but a bank bailout, but they’re the same,” he said in an interview. “We’re not in a position to dictate. The banks are in deep, deep trouble, and we can’t pull them out ourselves.”

Mr. Lucey said that Mr. Cowen was correct “in playing coy and cautious until absolutely certain what the situation is and what’s on the table, to get the strongest deal he can.” But “pride cometh before a fall,” Mr. Lucey said. “We’re in serious danger of falling off a cliff.”

Irish pride is an important factor, given how long the country and its currency were tied to Britain and the pound. While both countries joined the European Union only in 1973, Ireland embraced the euro, which Britain has not, as an important sign of its independence and economic sovereignty.

Any rescue plan will come with conditions negotiated by the European Union and the International Monetary Fund, as was the case in Greece.

Germany in particular is pushing Ireland to raise its corporate tax rate of 12.5 percent, one of the lowest in the euro zone, to reduce its deficits. But Dublin is resisting this sort of intrusion in its affairs, Mr. Lucey said. A tax rate that Germany and other European nations see as unfair competition is viewed in Dublin as a critical element in its economic success, past and future.

A significant part of the pressure has also come quietly from the European Central Bank, which has been buying sovereign bonds and supporting the banks with billions in liquidity. The bank would prefer that the governments take on the burden through the funds they set up this year.

Niki Kitsantonis in Athens, Stephen Castle in Brussels and Landon Thomas Jr. in London contributed reporting

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